Green Banks – Sense or Folly?

20 Jan Green Banks – Sense or Folly?

A green bank is a public-private entity that provides funding for clean energy projects. The goal is to encourage the growth of clean energy to combat climate change, reduce our reliance on expensive fossil fuels, and become sustainable. For green banks to become a reality, each state must determine and enact its own legislative policies. Currently, there are six states that have adopted green banks. They are California, Connecticut, Hawaii, New Jersey, New York and Rhode Island. Maryland and Illinois are in the emergent stages of legislation to institute green banks. At present, Nevada has legislative policies in place for a green bank. Further actions are still needed by the state legislature to establish PACE (Property-Assessed Clean Energy) financing to go along with the green bank. The PACE investment model is straightforward and impactful. It allows for the financing of clean energy projects through property tax bill assessments for property owners. Benefits to this model include lower risk of loan defaults, long-term financing opportunities, and unpaid portions of the loans will be inherited by new titleholders upon the sale of the property. The assessments remain with the property and in cases of default, the property tax payment is paid before the mortgage.

The road to completing clean energy projects can be long and arduous due to financing issues. In general, green banks offer favorable rates to homeowners who want to install solar. For example, it would help potential customers who want solar but lack a credit history or who possess a low credit score to be able to secure loans to do so. If more people can have access to financial resources to going solar, they would be able to participate in the clean energy movement and accelerate our independence from fossil fuels.

How Green Banks Operate

Green banks were established to promote clean energy development. They are partially capitalized by public dollars. The methodology for such an institution was prompted by an increasing need to stimulate and accelerate the clean energy movement. Fossil fuels take thousands of years to form, and our dependence on them is outpacing its finite supply. Renewable energy sources are fundamental to our survival.

The purpose of green banks is to develop private sector relationships to help create a financing structure that will support residential, commercial and industrial clean energy applications. The use of public funds is limited and discretionary so it is imperative that a public-private partnership is set up to provide the necessary funding for clean energy projects. Through the private sector, a lot more money can be raised. Many businesses are flush with capital, but need to partner with the right venture to further its growth and develop its environmental portfolio.

Although solar panels and racking prices have dropped in recent years, the high upfront costs associated with them have deterred many people from adopting solar. The solar market has been heavily reliant on federal tax credits and subsidies to thrive. A green bank would alleviate and address any financial concerns and provide people with an opportunity to go green.

Green banks must be flexible in their extension of loans in order to spur clean energy projects. Low interest rates and long payback times are important components for a successful green bank. Clean energy projects must operate with positive cash flow from the very beginning in order to sustain stamina throughout the life of the project.

With more policies in place that guarantee the success of clean energy projects to obtain funding and reach completion, green banks can be key players on the roadmap to success. Green banks need to differentiate themselves from traditional banks. They need to market themselves as a pro-clean energy entity to successfully lead the charge.

Model of Success

Connecticut was the first to launch a green bank in the United States in 2011. It has been extremely successful with a completion of 8,800 projects and more than 10,000 homes installed with solar panels. Job creation at 6,200 was a much-needed benefit, as well as a reduction of one million tons of carbon emissions. Connecticut has been looked at as a model to replicate.

Much of Connecticut’s success stems from its capitalization, its capability to issue its own bonds, its aptitude in aggregating projects to build scale, and its mastery in building a sizable portfolio that would attract the interest of private investors. The ability of the Connecticut Green Bank to optimize its public funds was the precursor to its success. A team of knowledgeable and green-minded employees also contributed to the continued success of the nation’s first green bank. For example, loan officers accredited by the U.S. Green Building Council (USGBC) would be beneficial as they would be knowledgeable with the Leadership in Energy and Environmental Design (LEED) program ratings criteria. Banks that have employees who are trained to work specifically with the financing of environmental projects will ease the loan process for applicants, as well as easing any uncertainties that potential investors might have.

A well-defined strategy is inherent to the successful operational structure. The green banks must be able to customize their products and services to accommodate for the different state regulations and policies, as well as the business model of the entity interested in applying for the loan. They need to offer favorable rates to attract the market. There must be standardization in financing methods. Favorable terms such as low interest rates and longer payback periods allow for solar installations and other clean energy efficiency measures to be realized as it would eliminate the deterrent of upfront costs.

Challenges for Green Banks

The biggest barrier to establishing a green bank is lack of access to capital. Green banks will have to raise private capital as public funds are generally limited. Government funding can jumpstart a green bank, but it is private funding that will keep it going. This is where the development of key partnerships is necessary to the upstart of a green bank.

Governments cannot combat climate change alone. They cannot adequately fund all the necessary requirements needed to make serious change. Nor do they have the knowledge and expertise required for such an undertaking. This is where the private sector comes in. Private investments can help increase the amount of funding for clean energy projects. They can pick up where public subsidies, such as rebates, left off. The technical knowledge and proficiency that the private sector can bring to the table will enable better processes and technologies to be used for these projects. The more projects that receive proper funding, the more that can reach completion.

Regulatory changes could disrupt green banks from starting. Investors don’t want to commit huge sums of money to a project if there is a risk that regulatory policies would change during the project’s duration. Uncertainty and unfamiliarity also pose challenges as lenders may not be attuned to a project’s scope and viability.

A common complaint about green banks is their slow ability to distribute funds once they are raised. Green banks need to set up and implement an efficient system of raising and disbursing funds on a timely schedule. Matching the right lender to the right project is critical and green banks must have the expertise and know-how to manage their accounts. Green banks need to be able to identify possible roadblocks and be able to account for them. A faster turnaround time will allow for more projects to become a reality. More projects financed means a better environmental domain can be achieved.

Benefits to Residential Customers

For residential consumers, solar is considered a long-term investment. There is a high upfront cost associated with solar panels, which are then defrayed over time with savings from consumers’ utility bills. Green banks have better and more options for consumers to finance their investments into solar than traditional banks. Consumers who cannot get loans due to a poor credit history would especially benefit from a green bank.

Green banks can make it affordable for residential consumers to go solar because they can offer lower interest rates. They are primed specifically with the goal of getting people to pursue clean energy projects. They want to see these projects come to fruition. Financing is structured in such a way that repayment of the loan in addition to the remaining utility bill is less than the prior utility bill alone. Consumers have to see a cost savings in order to jump on the bandwagon of implementing clean energy projects.

Focus on Nevada

Nevada is one of the sunniest places on Earth. It would make sense to take advantage of solar as it is a free and renewable source of energy. Climate change is real and solar can help combat its effects. Nevada is in a favorable position to promote clean energy development. The state is currently evaluating legislation for the creation of a green bank that would enable more clean energy projects to be realized.

The solar industry had been devastated and left stagnant when the Public Utilities Commission (PUC) decided to administer new rates for all net metering customers in Nevada. Although, a decision to grandfather existing net metering customers was a recent victory, the damage had already been done. The year of 2016 saw fewer installations and massive layoffs when two of the largest solar installation companies left the State, while some others folded. Job creation would be another motivating factor to embrace a green bank. It would revitalize the industry and stimulate interest in solar again. The renewable energy grants, rebates, and subsidies offered by NV Energy are almost gone and reimbursements for selling excess power back to the utility will continue to drop per the new rate structure, which lend to grounds ripe for sowing the creation of a green bank.

Nevada relies heavily on imported fossil fuels for energy, about 90% in fact. A Nevada Green Bank would make a significant difference in how the State can reduce its reliance on expensive foreign fossil fuels and encourage its clean energy growth. Nearly all state-level clean energy support stems from grants and rebates. The future success of the State’s economy may depend on the growth of the electric vehicles (EV) market. In Nevada, transportation is the largest user of energy, followed by the building and industrial sector.

Nevada has always been invested in the clean energy movement. The Governor’s Office of Energy (GOE) runs many of the State’s clean energy programs. Also, the Governor’s Office of Economic Development (GOED) has provided tax incentives for companies, such as Tesla with its Gigafactory, to relocate their operations here. Another example is tax abatements being given to producers such as Ormat Technologies, Inc. (geothermal) to develop and implement large-scale clean energy projects. There is room for growth and improvement and Nevada is just at the cusp of a resurgence in the clean energy movement.

A study to determine the viability of a green bank in Nevada was recently conducted by the non-profit Coalition for Green Capital with support from the Energy Foundation and presented to the subcommittee of the governor’s New Energy Industry Task Force. The study found that many clean energy projects are not brought to fruition due to financing challenges, all of which could easily be addressed by a green bank. Some of these challenges include lack of long-term financing, predevelopment costs, and uncertain resource adequacy. The study also outlines the impact that a green bank would have, recommendations for establishing one, and the potential of Nevada’s energy landscape.

It is important for Nevada to enact legislation to allow for the creation of a green bank. The number of potential customers to go solar could rise if they are able to have help in financing the high upfront costs of a solar system. EVs could also see an increase in interest. Many people want to become more environmentally friendly, but cannot afford to do so. By giving people access to better financing programs, clean energy projects do not have to remain a dream, but can become a reality.

Future in the Making

There are plans in development to establish a green bank network that will accelerate the process of clean energy investments on a broader spectrum. Spearheading this new initiative are the UK Green Investment Bank, Connecticut Green Bank, NY Green Bank, Japan’s Green Fund, Malaysian Green Technology Corporation and Australia’s Clean Energy Finance Corporation. These banks have experienced success in the development of their own programs, and now want to share their expertise and knowledge to implement more green banks across the nation and the world to further the advancement of clean energy projects. It is important that green banks remain at the state level and not the federal. Those states seeking to replicate their formula of success should encompass policies to ensure the success of their programs locally.

Knowledge sharing is important in developing new green banks and for furthering the relationships among public and private sectors. Green banks are the way of the future for clean energy and this business model will continue to push new projects to completion. For Nevada, the next legislative step is to enable PACE financing so that the state can utilize its green bank option.